Trendline Breakout Strategy TBS
This strategy is a fantastic strategy that is commonly used in forex trading by experienced traders. Trendlines are lines drawn to connect two or more price wave turning points on a chart especially when a trend is formed. It is an important tool for Forex technical analysis of trends.
Trendlines are drawn to link two or more highs (price peaks or inverted V-shape price movement) on a wave to form descending trendlines. They are also drawn to connect two or more lows (price troughs or V-shape price movement) on a wave to form ascending trendlines. Trendlines extends into the future on the chart to act as support or resistance.
Trendlines are used for the analysis of trend on any currency pair and on any time frame. Learning price action is also vital when using the Trendline Breakout Strategy.
Multiple trendlines are drawn on the chart sometimes, especially when price movement cuts across a large time frame. Steep or almost vertical trendlines have a short lifespan.
Technically, many traders use the wick of the candle to draw trendlines, while some use the body of the candle to draw trendlines.
Trendlines form and intersect every now and then. They need to be adjusted more often due to price dynamics.
-The more important a trendline is, the greater the price movement once it is broken or intersected/crossed.
-Important trendlines connect multiple peaks and troughs together and are found in higher time frames such as 1 hr or higher time frames. Lesser time frames are also good but they are noisy (noise is the small random price movement that makes it difficult to identify a trend) at the same time.
-Whenever there is a breakout of a significant trendline, big price movement follows.
-Price intersection/crossing on trendline is important in this type of trading strategy.
-The moment price touches and consolidates around a trendline, then there is a high probability that price will most likely break or intersect/cross that trendline soon.
-When an up moving price crosses a descending trendline and closes above it, there is a high probability that the price will continue to move upwards.
-If a down moving price crosses an ascending trendline and closes below it, it is very likely that the price will continue to move downwards.
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Ascending and Descending Trendline
Basically, ascending trendlines are drawn to connect two or more troughs/swing lows (tilting or sloping upwards). They are drawn below price.
However, descending trendlines are drawn to connect two or more peaks/swing highs (tilting or sloping downwards). They are drawn above price.
Possible Scenario Before Breakout
Price will either bounce on the trendline or break it. It bounces on trendlines when it fins support or resistance at the trendline area.
Trendline breakout happens when price intersects the trendline.
Pull Back and Trend Continuation
Sometimes, price breaks the trendline, pulls back to test the trendline, before continuing in its breakout direction.
TBS And Bullish Or Bearish Flags
Trendline Breakout Strategy is also applied to bullish and bearish flag setups.
Fake/False Trendline Breakouts
This is identified after 1 to 3 candle bars might have been formed at the breakout point. They are usually identified with reversal price action. False breakouts lose momentum steam more quickly.
The higher the number of candle bars formed away from the trendline breakout point, the lesser the chances that it will be a false breakout.
The type of candlestick pattern formed at the breakout point also matters. Reversal candle bars will definitely prepare your mind that breakout is possible soon as soon as it forms.
The following candlestick patterns will signal a possible breakout when you see them form shortly after a breakout point; Dark Cloud, Harami, Engulfing, Inside Bar
It is advisable to move stop-loss to break-even or lock-in profit when you see that a reversal candlestick pattern is formed.
Sometimes, the assumed fake/false breakout may also be a temporary pullback, and you trade gets stopped out. You may re-enter the trade once price continues in the direction of the trendline breakout.
How To Enter Your Trades Using Trendline Breakout Strategy
-Analyse the chart to identify two or more peaks or troughs.
-Connect the peaks or troughs with a trendline and wait for the time when the price will intersect the trendline.
-As soon as the trendline is intersected/crossed by a candlestick, your entry price will be placed a little at the candlestick high or low price. If it is a bullish candle, entry price will be placed a little (say 5 pips) above the high price of the candle. Assuming it is a bearish candle, your entry will be placed a little distance below the low of the candlestick.
-The stop-loss will be placed a little distance below the low of the candle if it is a bullish candle, while the stop-loss will be placed a little distance above the high price if the breakout candle is a bearish candle.
The length of the breakout candle is very important. Long breakout candles are less tradable as the stop-loss tends to increase the risk in the time of fake/false breakout.
Advantage Of Trendline Breakout Strategy
The main advantage of using trendlines is that trendlines do not lag like other indicators. Indicators signals are sometimes late.
Trendlines helps in identifying major trends, minor trends, and corrections.
Trendline Icon on MT4 Application on Computer or Mobile Device
Caution: Forex trading is risky. It is advisable that you acquire enough experience before you start to trade with real money. Do not invest in money that you cannot afford to lose (it is important that you study leverage, lot size, and money management in Forex trading very well before you execute your trade decision).
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